Occupational Pensions: Increase in pension accruals does not justify a reduction in pension benefits

By judgment of 8 December 2020 (docket number: 3 AZR 64/19) the Federal Labour Court (Bundesarbeitsgericht – BAG) has ruled that an increase in pension accruals (as a result of statutory changes in accounting law) does not justify a benefit-reducing adjustment of the pension commitment.

Facts:

The plaintiff (widow of a former employee) received a widow’s pension based on a pension commitment that contained a fixed pension adjustment rule. In July 2016, the employer (defendant) informed the plaintiff that he would no longer fulfil the adjustment obligation that arises from the pension commitment; In future, increases would only be made pursuant to the statutory regulations (and not pursuant to the provisions set out in the pension commitment). The employer argued on the basis of Section 313 German Civil Code (so-called “Störung der Geschäftsgrundlage” – “Interference with the basis of the transaction/contract”). This provision allows for the adjustment of a contract if circumstances that have become the basis of the contract have changed significantly after the conclusion of the contract and the contracting parties would not have concluded the contract in this way if they had foreseen this change. The reason for the interference with the basis of the transaction/contract was significantly increased pension accruals – that must be shown on the balance sheet – as a result of a change in the law in 2010, the employer argued. The plaintiff argued that the adjustment of benefits must still be made in the same way as in the past.

Ruling:

The Federal Labour Court followed the plaintiff’s view. In principle, so stated the court, the adjustment/reduction of pension benefits could be justified on the basis of Section 313 German Civil Code. In the present case, however, the requirements for this were not met.

The court argued that the increase in pension accruals was to a large extent based on a promised pension trend and promised salary developments. Both of these components, however, are part of the pension commitment itself and cannot only be considered to be the basis of the transaction/contract. But also in other respects an increase in pension accruals does not constitute an interference with the basis of the transaction/contract according to Section 313 German Civil Code. Pension accruals, so stated the court, do have an impact on the balance sheet profit or loss of a company. However, this does not justify the revocation of ongoing pension benefits and thus also does not justify the amendment of an adjustment rule. This is because according to the legal valuations of the Occupational Pensions Act (Betriebsrentengesetz) not even an economic crisis can justify the adjustment of ongoing pension benefits due to an interference with the basis of the transaction/contract pursuant to Section 313 German Civil Code. This would contradict the legal distribution of risk.

Conclusion:

The Federal Labour Court’s decision has surprised many experts. There was hope among many employers that the court would take this case as an opportunity to provide employers with a further instrument to react to the increasing economic burdens arising from occupational pension schemes. The reasons for these economic burdens are in particular the continuing low interest rates and the significant increase in pension accruals. It remains to be seen whether the court will rule in the same way in future similar cases or whether it will further modify its ruling and – depending on the plaintiff’s specific arguments – allow exceptions to this ruling’s principles.